G. Breuer's Newsletter
July 2009
Dear Clients & Friends,
We are sending to you the monthly edition of our Newsletter where you will find an update on:
Please do not hesitate to contact partners Jorge Otamendi and Diego Fissore for any specific question you may have after reading it or for any other issue you may need advise on.
Best regards,
G. Breuer
25 de Mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313 8100
Fax: +54 11 4313 8180
The political environment changed after the results of the June 28 elections were known. The ruling Victory Front party lost in all major jurisdictions such as the City of Buenos Aires, Córdoba, Santa Fe, Mendoza, and even in the Province of Buenos Aires, where Mr. Kirchner himself headed the ticket and all the major territorial leaders were made part of the lists through the quasi-unconstitutional “testimonial” candidacies.
The final numbers of the defeat were conclusive everywhere, even in the Province of Buenos Aires, where the short difference of 2% hides reality: without the tricks, the difference would have been much higher. And the Government knows that, and this is why the sensation of defeat was overwhelming. Regardless of the spinning that the President expressed in a press conference following the elections, it is clear in Argentina that 70% of the ballots were against the current Administration and most of 30% of people who voted in favor did not actually vote for the Kirchners but for the territorial chief that on election day was circumstantially with the Kirchners (many of which may or will abandon that political alliance). It must be noted that the ultra Kirchnerist Governor of the Province of Buenos Aires has lost control in the provincial Congress.
The fact that the ruling party was defeated, although anticipated, created the illusion that many things would change, in particular, the way of ruling the country -discretional, by decree- that this Administration used so frequently.
Despite those expectations of change, the few steps taken by the Government suggest that there will be few changes, and if there are some, those will have to be forced by a firm opposition, since the Government has shown these days that the only changes it will promote will be “cosmetic”, as many analysts and opposition members call them in Argentina.
There were a couple of initial announcements of change. The first one was an offer of the President to open a “dialogue” with all sectors and parties so that all contribute to the improvement of the country. The announcement was well received (but for few politicians who said that the right place to talk was Congress). But then, the dialogue was called to talk about an “electoral reform”, which is no priority for any sector in the country and not even for the current Government. The dialogue has started but the main members of the opposition are saying that it is right to talk, although actions are needed. And actions still are not seen at all.
Speaking of changes that are not changes, and after saying that there was no reason to change ministers, several ministers left the cabinet. The new ministers were old Kirchner allies and most of them had already been members of the Cabinet or held important positions. The new Economy Minister was in fact the former ANSES (Argentine Social Security Administration) Director, Mr. Boudou, and he was the person in command of the take-over of the AFJP (Retirement and Pension Fund Administration) funds, one of the most controversial measures adopted by this Administration and sure to be one that will be talked about in the future when this Administration is remembered. That change was not only not a change, and, if it is, the change goes in the exact opposite direction to where it should go. Of course, reality may prove otherwise but, so far, there are no indications of this not being the case. Even the new minister himself claimed that there was no reason for expecting deep changes.
The rest of the Cabinet changes were superficial also. The Justice Minister was promoted to Cabinet Chief, the former President of Aerolíneas Argentinas was sent to the Justice Ministry, and the son of a labor lawyer closely linked to allied unions took over Aerolíneas Argentina. All of these changes can be called no changes at all.
Opposition officials, including dissident members of the peronist party, criticized Government’s cabinet reshuffle for the same reasons expressed before here, stressing that the changes were superficial, failed to address demands for a policy shift and showed once again that Mrs. Kirchner has not “read” properly the results of the midterm elections.
Another of the supposed big changes was the one announced with the official statistics entity, the INDEC, that after an intervention ordered by this Administration started to issue indexes that were highly criticized and questioned as tampered and manipulated for political purposes. The person behind the manipulation is said to be the Secretary of Commerce (following instructions from high up in the scale of power), who remains in office despite the changes, proving that the main officials are still the same.
The new Economy Minister announced what would be the measures to provide transparency to INDEC, because “something needed to be done with it”. The announced measures, for many of the analysts and opposition members, are only more cosmetics. These main announced measures were as follows: (i) a new technical position supervising INDEC was created and a person very close to the Secretary of Commerce was appointed to cover that place; (ii) two Councils, one academic and another social and economic, formed by members of national universities and representatives of sectors to be appointed by the State, will be in charge of reviewing statistics and methods as from 1999 (the problems started in 2007) and making recommendations. These commissions reminded us of a famous saying often attributed to Mr. Peron himself, who said that when you did not want to solve a problem, the best way of achieving that purpose was to create a commission.
In the meantime, the Government announced its intentions to recapture and buy back all securities linked to INDEC, which many see as an intention by the Government to avert potential legal actions by holders of such securities on grounds of tampering the indexes that had to be used to update their value.
And the opposition, most of the objective analysts and the people in general have very clear that INDEC’s indexes are tampered, and not only those related to inflation but also other key indexes such as poverty levels, levels of indigents, and other key data that is necessary to promote sound social policies. Even former officers of INDEC, who were transferred or indirectly removed from their positions, started to come out and publicly speak as to the tampering for political needs of the Government. The INDEC issue, since it openly alters the inflation rates, has proven to be very prejudicial for the credibility of the Government, and this Administration does not seem to find a way of solving it.
So far, only meetings with university experts took place, and to regain any confidence at all, new indexes will have to be analyzed. There are no credits open to the Government on this front.
We finish the political comments for this month with two comments of current and probable developments for the coming month. First, we mention that one of the persons who was a member of this Administration until a few weeks ago, the former Secretary of Transport, is being investigated for a supposed purchase of a very expensive jet. This issue is making headlines every day, and it is an indication that winds may be changing in courts for officials of this Administration who so far did not have trouble in courts at all, despite allegations of wrongdoings.
Second and most importantly, we mention that after the elections Congress will start working again. And there are many laws that will have to be dealt with that are essential for this Administration. One of them is the extension of the ability by Congress to tax exports, which is a major issue since tax on agricultural exports is one of the main sources of funds for this Administration. A draft law by the official party in this respect was sent to a Commission in the House of Representatives (approving the extension of the abilities as they are now for a year), and since no agreement with the opposition was reached, the issue will be brought again soon. This is a first and important wake-up call. Even without the new Congress (i.e. with the changes representing the results of the June 28 elections), no automatic majorities may be obtained. And there are many important laws to be dealt with other than the export tax laws (Superpowers, Budget Law) that may represent imminent trouble for an Administration that is not used to talk.
As usual, we hope for the best, which is true dialogue and negotiations to pass the best possible laws that the country is in desperate need of. Most likely, we will see the results in the coming month of August. And as usual, we cannot conclude this report other than by saying that it is possible to say many things about Argentine politics and, likely, it would be true. But you cannot accuse Argentina of being boring.
The Economy news of this moth is related to the fact that after the elections, the time came when reality needed to be faced. Spending rose in the run-up to the elections, and the primary budget surplus shrank 85% in May from the same month a year ago.
Due to the maturities to be faced during what is left of this year, the smaller surplus should be an important problem, since there are no lenders willing to finance Argentina, at least in the international financial markets. Still no important announcement has been made in this respect, such as arranging with the Paris Club creditors, holdouts or an approach with the IMF.
And the rest of the figures of the economy do not look good either, although for INDEC they look slightly better. The official IPC (inflation) increased this month 0.4%, a percentage that was below the one calculated by private estimators. Inflation is not growing as much as a result of the recession felt in Argentina.
The industrial activity is not growing, and even INDEC recognized that fact. According to the official statistics office, industrial output grew only 0.6% from a year earlier, growing for the first time after five consecutive months of drops. Certain industries registered a steep slump, like steel production. Economic analysts say, not surprisingly, that INDEC’s figures are benevolent not only on industrial activity but also on unemployment and economic growth.
Argentina’s trade surplus widened by more than 600% in June from the same month a year earlier as imports fell further due to slower demand, the Government said. Imports fell by 30% during the month, to 3.63 billion US dollars, and while exports also dropped, they fell more gradually that in previous months. This may facilitate keeping the price of the US Dollar under control, always a key variable in Argentina, but may not help to raise tax collection.
With these numbers, there are many reasons to be cautious as to the status of the economy because tax revenues are not likely to show surplus, and that surplus is the only genuine source of funds for the Government. We note that despite the information that we mentioned, the president said in a very recent statement that all maturities will be faced despite the economic downturn. In that respect, a maturity of principal and interest for the Boden 2012 security will be faced in the coming week, and the Central Bank will facilitate the cash for making that payment. The Central Bank said it will be receiving cash in return.
On the financial side, the Economy Minister announced that he will seek to swap and buy back the inflation-indexed bonds that account for about 40% of its sovereign debt. The so-called CER bonds, which are at the centre of the controversy over the country’s official consumer price data (INDEC) are the ones to be swapped. That announcement caused an upheaval in the local bonds markets. Many want to make a profit from that potential exchange, although information in that respect is very scarce.
All of this information shows that we are undergoing difficult times and difficult decisions may need to be taken. And the new political scenario may offer this Administration as many challenges as the economy itself. Next month, we may have a clearer view as to where the country is heading towards.
You may read the July edition of our Boletín Informativo, G. Breuer’s monthly publication focused on general legal information sent to our Argentine clients & friends.
For more information on local legislation, you may read the July edition of our Boletín Informativo sent to our Argentine clients & friends.
G. Breuer
25 de Mayo 460
Buenos Aires - Argentina
Tel: +54 11 4313 8100
Fax: +54 11 4313 8180
Please note that the information given in this bulletin is for general purposes only and does not intend to provide comprehensive legal advice on any issue.
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© G. Breuer, 2009.